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Aussie Junior Gold Mining Stocks Play Catch Up

Commodities / Gold & Silver Stocks Oct 08, 2007 - 01:49 PM GMT

By: Neil_Charnock

Commodities Aussie Junior companies have been hot for over two years now – pick the right ones and you are making big money fast and there is a classic pattern forming that indicates a new cycle has only just begun. The bottom made in April 2005 has been followed by two distinct up-legs and both ended in a sharp correction. If you also invested when we suggested – bringing money into Australia from the US you have been making even bigger money as our Dollar is in an uptrend against the USD. I have included a chart of the ASX Gold juniors (which is provided as a live link on GoldOz thanks to our friend Nick Laird at Sharelynx) as proof of this directly below.


Before I start on a comment on stocks I want to continue with some general education – for those that have not yet grasped precious metals issues. For those that have already you might like to skip down a little into this article.

The Argument for Resources and Precious Metals is Simple

Let me talk about two alternative investment classes to begin this commentary. The risk of holding cash as an investment class is misunderstood by most people. Thanks to a lack of professional financial education they are almost clueless that their savings are not keeping pace with the real rate of inflation as measured by the purchasing power of that cash. The real price inflation rate has been measured for normal households including all factors (not “adjusted” for seasonal factors etc) and it was found to be nearer 10% not the reported 3% figure provided by the Government Treasury. Cash is not a good investment at a 7% return if you can get that and it is being inflated into an ever lower value – a guaranteed loss.

Real estate has made property investors feel very smart for over two decades however affordability as measured by wages versus house prices is at an all time low. Property prices have moved very strongly and wages haven't and the only reason prices have managed to move so high is that the cost of borrowing more has dropped with interest rates. As a direct response to this mechanism you could borrow more and more with the same repayment level and this has caused an unsustainable spike in house prices. Well guess what – interest rates have stopped dropping so house prices have to either go sideways while wages catch up or drop in response to rising interest rates and the inability of borrowers to service large loans.

Many feel richer because their home is now worth over $500,000 but they do not stop to think that it is only convertible for one other house no matter what. They do not stop to think much about the fact that this $500,000 does not buy a great deal these days compared to when this sum was a very large amount of money. Those that have not purchased a house are acutely aware that house prices have now inflated well beyond their reach so they are trapped in an ever inflating rental environment. My key points about property are;
1. That it is no longer the great investment it was and must mark time or fall
2. The house value increase is a massive form of inflation - rental increases are connected to this factor.

Food, rent (or mortgage) and fuel are now a tremendous strain on most family budgets in Western economies. This is only offset by cheap goods that do not last long – quality of everything from clothing to cookware is a huge issue. Things appear to be cheap but you buy them over and over so is this just another illusion? Houses are not built to the standards of yesteryear – nowhere near as solid but big and able to consume huge amounts of resources in a single gulp. Buying lesser quality or a smaller portion of goods for the same cost is also a form of inflation – and hidden from those Government statistics.

Where is this all leading??


Houses and all sorts of goods need to be replaced faster due to cost savings / poor quality issues compared to earlier construction designs and standards. This is a form of inflation too – quality and longevity issues – what I mean is that if the goods are cheaper by yet they need replacing a number of times over the life of the older higher quality goods then the so called cheaper goods were not cheap at all.

Just an example - a pair of socks costs $3 and wears out in 6 months compared to yesteryear when a pair of socks lasted two years and at a cost equivalent of $8 (adjusted for inflation). So take the $3 cost of the socks today and multiply by 4 (4 periods of 6 months in 2 years) and it equals $12. $3x4 =$12 So the $3 socks looks cheap compared to $8 but you pay $12 for your foot warmers over a 2 year period and this is 50% inflation with an apparently lower cost! This is happening every where! It is not just a cost and inflation issue it is also about resource consumption as 4 pairs of socks have had to be produced. When you apply this to refrigerators, cars, houses, clothing etc it becomes a consumption issue of major proportions placing pressure on limited resources.

Resources are finite on planet earth and this modern throw away fashion weighs heavily on the consumption of these resources. Globalization is gathering an ever increasing head of steam and this is also placing tremendous strain on the Earth's resources. Globalization has long since passed the point of no return and critical mass – here in Australia at one of Earths main quarries we hear a loud sucking sound of resources leaving our shores.

So this message is simple – we have massive competition for resources and we have inflation so it is clear and easy to understand that resources and gold (silver too) are the place to be invested.

Survival Mode Mentality Needed

We are in a race to find new cleaner ways to live our lifestyles so that natural resources such as air and water are not contaminated to a degree that leaves the planet uninhabitable – unable to sustain life at all with any quality whatsoever. So we have a need for environmental survival and financial survival in a rapidly changing world.

Just as important is the money and investment aspect for this is a “money planet” as we are trapped in this by the banks, debt and banking system. People need to get financial education to make their money work for them – this is more important in this globalized world for a number of reasons. In the West we have reasons such as shrinking real wages, rising real costs, increased risks throughout the whole financial system and the lack of a chance of a real catch up in real wages and purchasing power of individuals. This is a firm down trend and it will not get any better it will get much worse if you don't fix it for yourself.

I don't care if you are not really interested or not it is a matter of survival. Refuse to listen at your own risk – ignore the sound of that incoming missile at your own peril and if you think “this guy is exaggerating” you are sadly mistaken. If you are currently living a comfortable lifestyle but not making any preparations for a long rainy day – and you keep on with this game of - I have to have the latest style of… car, TV, couch, kitchen, holiday, pergola or garden etc and your chance to financially prepare for potentially disastrous times will be lost. I am not saying don't have fun today – I am warning that you have to look carefully at preparation beyond that super fund and your house value because it may not be what you expect when you need it most in future.

Aussie Resource Companies

No wonder this market sector has been doing well this past few years – and mostly gone un-noticed because of continued good times in bank stocks and industrials. Will resource and in particular gold stocks outperform traditional investments over the next 5-8 years? According to our analysis – this has called a great deal correctly the last 5 years – absolutely!

Out performance by resource and precious metal stocks will be seen as a gross understatement in the fullness of time. I note a global view that Australian resource stocks are valued differently or have been in the past and currently they still are – in fact in many cases they are highly undervalued. But has anybody noticed the closing walls of globalization or the resource wars at our doorstep lately? Communications and technology are bringing equilibrium to financial markets via arbitrage and this phenomena is getting stronger – a continuation of a trend.

Even though we are falsely seen to be a backwater by much of the world it does not stop China, Japan, India and the rest of Asia, Russia and the Middle East beating a path to our door. And when the rush for gold is really on the rush for our gold stocks will be heard around the world. Our industry has some state of the art mining operations and a great deal of management talent – we have rich mining provinces and we have stable government. Our overall sovereign risk, which takes all manner of political and environmental considerations into effect, is world class right up there with Canada and even above the USA.

Make no mistake our industry has raised money, made tremendous progress and is positioning itself professionally for the continuation of the global resource boom. Our yields are great and there is a huge amount of value Down Under. I am fortunate to work with an analyst that has reached the elite global level in the finance industry and survived there for over two decades. He happens to have specialized in Forex, metals and resources – a technical man who has also worked as a consultant to major mining houses. Colin writes the GoldOz Weekly Newsletter which is a general advice publication that features top down analysis.

Top down analysis is the professional approach learned at the top of his profession so we cover right from the world markets, Australian markets, the global metals exchanges and then down to individual stocks. Why general advice you may ask? Because then we can deliver a wider coverage at a lower cost making our services available to all levels of investor. I will be further explaining how to use such a tool to the greatest advantage in keeping with our philosophy to provide investment education.

Basically, in the GoldOz Newsletter Colin expertly provides the trend lines and shorter term support and resistance levels so you can invest your money for excellent gains over and over on an annual basis for stellar returns. You may also elect to use support levels to pick up stocks for longer term investment purposes if this suits your needs better. I prefer to make more and work my money harder however some investors have taxation restraints and time considerations that limit this activity. In any case the second opinion is invaluable and so is the educational value.

We also provide an Excel spreadsheet product with fundamental coverage and another product again – a PDF set which is a brilliant thumb nail brief on over 300 stocks it is a time saving device that sorts and assists you to construct a watch list that suits your risk and style for just $AUD35. There has never been a better time to turn on your Australian radar and get some research and get prepared for what lies immediately ahead. The train is leaving the station get aboard.

Should you wish to participate in the Australian Resource boom and make money here you should consider a visit to www.goldoz.com.au and to purchase a subscription to our Newsletter.

Good trading / investing.
Regards,

By Neil Charnock
www.goldoz.com.au

Copyright 2007 Neil Charnock. All Rights Reserved.
REGISTERED ADVISOR – WHO THE ADVICE COMES FROM IN THE GOLDOZ NEWSLETTER: Colin Emery is currently a Branch Manger and Senior Client Adviser of a Stock Broking Company in Queensland Australia. Prior to his work in Share broking he spent nearly 20 years in Senior Management and Trading positions in Treasuries for major International Banks such as Bank Of America, Banque Indosuez, Barclays Bank, Bank Of Tokyo and Deutsche Bank AG. He spent a number of years as a Senior trader in New York , London , Singapore , Tokyo and Hong Kong with these institutions. He also was Global Head of emerging energy, emission and commodity products for the leading Energy and Commodities brokerage firm of Prebon Yamane Ltd – Prebon Energy for four years before moving to Cairns in 2003 to focus on the Stock market and Private consulting work. The private consulting and advisory work currently undertaken is with companies involved in Resources, Energy and Renewable Energy and Forestry.

Neil Charnock is not a registered investment advisor. He is a private investor who, in addition to his essay publication offerings, has now assembled a highly experienced panel to assist in the presentation of various research information services.  The opinions and statements made in the above publication are the result of extensive research and are believed to be accurate and from reliable sources. The contents are my current opinion only, further more conditions may cause my opinions to change without notice. The insights herein published are made solely for international and educational purposes. The contents in this publication are not to be construed as solicitation or recommendation to be used for formulation of investment decisions in any type of market whatsoever. WARNING share market investment or speculation is a high risk activity. Investors enter such activity at their own risk and must conduct their own due diligence to research and verify all aspects of any investment decision, if necessary seeking competent professional assistance.

Neil Charnock Archive

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